International markets were betting on Monday night that Greece would default on its debt as the cost of buying insurance against the country missing a payment on its bonds became the most expensive of any nation in the world.

The rising cost of buying insurance through so-called credit default swaps (CDSs) on Greek debt came amid continued prevarication among eurozone finance ministers about releasing bailout funds to the indebted country and a warning that Italy's credit rating might be cut.

According to Gavan Nolan, credit analyst at Markit, to insure €10m (£8.8m) of Greek debt would cost €2m every year for five years. No other country is as expensive to insure. Venezuela is the next most expensive, but even then is almost half the cost.

The Greek government faces a confidence vote on Tuesday, which is adding to anxiety among investors, particularly as European finance ministers have said the bailout needs to be accompanied by austerity measures.

Stock markets in Europe were weak on the opening, but a strong start by Wall Street helped to contain losses among European shares, with the FTSE 100 and the German stock market both ending 0.3% lower.

However, the Italian market was down further as investors reacted to a warning by Moody's that it might downgrade the country's debt rating.

With the cost of insuring against a Greek default rising, City sources were pointing to the potential controversy about whether the country's debt would be tackled in a such a way as to avoid the insurance sold through CDSs paying out.

Some sources said they were concerned that if holders of CDSs became entitled to payouts it would cause the institutions that sold the insurance to make multimillion pound payments.

This could cause the kind of Lehmans-style market "event" that European leaders fear could have a knock-on impact elsewhere.

Steven Major, global head of fixed income at HSBC, said the least disruptive outcome would be a voluntary default by Greece to enable it to "roll over" its debt – which means banks would accept new bonds for old with the same terms – rather than forcing Greece to the point of default by altering the terms of existing bonds, thereby prompting a default in the eyes of the ratings agencies.

This is on the assumption that a voluntary rollover would help banks to avoid taking big writedowns on the debt and, crucially, not allow CDSs to pay out.

While there are concerns about whether the institutions that hold CDSs would be able to make payments, Major cautioned that there are bond market professionals who would profit from an outright default.

"They've bought protection from CDSs and they want it to trigger because they might have a hedge or constructed a position for the very purpose," he said. "The worse thing that could happen to them is that the CDS doesn't trigger and they are stuck holding bonds. These investors want and need an 'event'."

According to Nolan, the last country to trigger a payment through a credit default was Ecuador in 2008, which was an isolated event and did not have wider implications.

Under the current terms being proposed for Greece, market experts believe that the CDSs would not need to pay out as holders of three-year bonds would be asked to hold them until maturity and then automatically buy a seven-year bond. This would be regarded as a "voluntary" restructuring.

Elisabeth Afseth, fixed income strategist at Evolution Securities, noted that while European governments did not like the existence of CDSs, they were containable in the context of Greece. But she noted: "There clearly is a contagion [threat] – the main risk is the bond market."